Go Harvey, go overseas, says Gerry

Dismayed by the worst retail downturn in decades, billionaire retailer
Gerry Harvey
says
Harvey Norman
has no plans to open a major new store in its home market this year for the first time in its 30-year history.

Harvey, who has railed against “unfair" competition from foreign online retailers, is opting to chase growth overseas in markets such as Malaysia rather than plough more money into struggling local stores.

While he does not foresee major store closures in Australia yet, the retail guru is anything but optimistic about the future of the local industry.

“It’s a turning point in retail – some will survive, some won’t," he tells The Australian Financial Review while inspecting horses at the Magic Millions yearling sale yesterday. “The whole Australian economy is running on resources. The rest – retail, tourism, media – we’re all struggling.

“It’s got to the stage where there’s no incentive to open a major new store in Australia. None. Our rate of expansion in Australia would be lower now than it’s ever been in ­Harvey Norman’s history."

Higher household expenses, the rise of online-only competition, and global uncertainty have all contributed to weak consumer confidence and a surge in personal savings rates.

Harvey Norman’s rival
JB Hi-Fi
and surfwear retailer
Billabong
were among those to downgrade ­earnings last month and analysts have warned that retailers such as
Myer
,
David Jones
,
Premier Investments
,
­Specialty Fashion
and
Noni B
are at risk of downgrading guidance or market forecasts.

In Harvey’s case, the weakest market conditions in decades have also sapped his willingness to invest throughout the cycle.

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Ten years ago, he says, after spending $20 million to build an outlet in Australia, it would be valued at between $25 million and $30 million on completion and making $1 million to $1.5 million a year in profit.

“Today, that story has changed. If we do a $20 million build, it will be valued for $17 million and make nothing to $500,000 a year."

Harvey’s solution is simple: invest outside Australia. Malaysia, with an increasingly wealthy population of 28 million growing at 4 per cent annually is just one market on the radar for rapid expansion.

There are plans to increase Harvey Norman store numbers in the South-East Asian country to 10 by the end of this year and up to 50 in the near future, the co-founder and chairman says. In addition to Malaysia, the group has 14 stores in Singapore, with two big stores recently opened in Europe – one in Croatia and another in Slovenia.

Harvey Norman managing director (and Harvey’s wife)
Katie Page
has been spearheading the push overseas, recently flying some of the world’s top designers into Singapore for the opening there late last year of her biggest Space store yet.

“At this point in time, there is a lot more opportunity and incentive to focus on that market," Harvey says.

“As retailers, we have very little choice but to allocate more funds where the growth will be."

Retail sales for November, to be released today, are expected to show another month of weak growth despite a rate cut and heavy discounting in the run-up to Christmas.

After rising just 0.2 per cent in October, retail sales are forecast to climb 0.4 per cent, according to Bloomberg data.

Retailers had been hoping the interest rate cut delivered by the Reserve Bank of Australia on November 1, the first in 31 months, would have spurred a stronger uplift coming into the peak trading period.

RBC Capital Markets economists say the move by many retailers to bring seasonal sales forward to November will not be enough to drive a month-on-month increase of more than 0.3 per cent.

“We doubt this will have been sufficient to entice online-savvy consumers," the broker says in a note. “Weakness in traditional retail is likely to be offset by spending elsewhere, including hospitality and services."

Harvey Norman’s Australian sales slumped 3.8 per cent in the first quarter, and are expected to be in decline through calendar 2012.

For a retailer that relies on moving big-ticket items such as televisions, tablets, and mobile phones, sticking to the script of not discounting in the current climate is nigh on impossible.

“The three big volume sellers have got no margin left in them," Harvey says. “Flat-screen televisions are still among our biggest sellers, but a TV that was $5000 five years ago is now $1500. It’s buggered all retailers, not just Harvey Norman."